II

103D CONGRESS

2D SESSION S. 2342

To amend the Internal Revenue Code of 1986 to improve the collection

of taxes of United States persons moving production abroad and foreign

persons doing business in the United States, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JULY 29 (legislative day, JULY 20), 1994

Mr. DORGAN (for himself, Mr. DASCHLE, Mr. SIMON, Mr. CONRAD, Mr.

FEINGOLD, Mr. REID, Mr. WELLSTONE, and Mr. LEVIN) introduced the

following bill; which was read twice and referred to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to improve

the collection of taxes of United States persons moving

production abroad and foreign persons doing business

in the United States, and for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Foreign Tax Compli5 ance Act of 1994’’.
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1 SEC. 2. TAXATION OF INCOME OF CONTROLLED FOREIGN

2 CORPORATIONS ATTRIBUTABLE TO IM3 PORTED PROPERTY.

4 (a) GENERAL RULE.—Subsection (a) of section 954

5 of the Internal Revenue Code of 1986 (defining foreign

6 base company income) is amended by striking ‘‘and’’ at

7 the end of paragraph (4), by striking the period at the

8 end of paragraph (5) and inserting ‘‘, and’’, and by adding

9 at the end the following new paragraph:

10 ‘‘(6) imported property income for the taxable

11 year (determined under subsection (h) and reduced

12 as provided in subsection (b)(5)).’’

13 (b) DEFINITION OF IMPORTED PROPERTY IN14 COME.—Section 954 of the Internal Revenue Code of 1986

15 is amended by adding at the end the following new sub16 section:

17 ‘‘(h) IMPORTED PROPERTY INCOME.—

18 ‘‘(1) IN GENERAL.—For purposes of subsection

19 (a)(6), the term ‘imported property income’ means

20 income (whether in the form of profits, commissions,

21 fees, or otherwise) derived in connection with—

22 ‘‘(A) manufacturing, producing, growing,

23 or extracting imported property,

24 ‘‘(B) the sale, exchange, or other disposi25 tion of imported property, or
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1 ‘‘(C) the lease, rental, or licensing of im2 ported property.

3 Such term shall not include any foreign oil and gas

4 extraction income (within the meaning of section

5 907(c)) or any foreign oil related income (within the

6 meaning of section 907(c)).

7 ‘‘(2) IMPORTED PROPERTY.—For purposes of

8 this subsection—

9 ‘‘(A) IN GENERAL.—Except as otherwise

10 provided in this paragraph, the term ‘imported

11 property’ means property which is imported

12 into the United States by the controlled foreign

13 corporation or a related person.

14 ‘‘(B) IMPORTED PROPERTY INCLUDES CER15 TAIN PROPERTY IMPORTED BY UNRELATED

16 PERSONS.—The term ‘imported property’ in17 cludes any property imported into the United

18 States by an unrelated person if, when such

19 property was sold to the unrelated person by

20 the controlled foreign corporation (or a related

21 person), it was reasonable to expect that—

22 ‘‘(i) such property would be imported

23 into the United States, or
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1 ‘‘(ii) such property would be used as

2 a component in other property which would

3 be imported into the United States.

4 ‘‘(C) EXCEPTION FOR PROPERTY SUBSE5 QUENTLY EXPORTED.—The term ‘imported

6 property’ does not include any property which is

7 imported into the United States and which—

8 ‘‘(i) before substantial use in the

9 United States, is sold, leased, or rented by

10 the controlled foreign corporation or a re11 lated person for direct use, consumption,

12 or disposition outside the United States, or

13 ‘‘(ii) is used by the controlled foreign

14 corporation or a related person as a com15 ponent in other property which is so sold,

16 leased, or rented.

17 ‘‘(3) DEFINITIONS AND SPECIAL RULES.—

18 ‘‘(A) IMPORT.—For purposes of this sub19 section, the term ‘import’ means entering, or

20 withdrawal from warehouse, for consumption or

21 use. Such term includes any grant of the right

22 to use an intangible (as defined in section

23 936(b)(3)(B)) in the United States.

24 ‘‘(B) UNRELATED PERSON.—For purposes

25 of this subsection, the term ‘unrelated person’
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1 means any person who is not a related person

2 with respect to the controlled foreign corpora3 tion.

4 ‘‘(C) COORDINATION WITH FOREIGN BASE

5 COMPANY SALES INCOME.—For purposes of this

6 section, the term ‘foreign base company sales

7 income’ shall not include any imported property

8 income.’’.

9 (c) SEPARATE APPLICATION OF LIMITATIONS ON

10 FOREIGN TAX CREDIT FOR IMPORTED PROPERTY IN11 COME.—

12 (1) IN GENERAL.—Paragraph (1) of section

13 904(d) of the Internal Revenue Code of 1986 (relat14 ing to separate application of section with respect to

15 certain categories of income) is amended by striking

16 ‘‘and’’ at the end of subparagraph (H), by redesig17 nating subparagraph (I) as subparagraph (J), and

18 by inserting after subparagraph (H) the following

19 new subparagraph:

20 ‘‘(I) imported property income, and’’.

21 (2) IMPORTED PROPERTY INCOME DEFINED.—

22 Paragraph (2) of section 904(d) of such Code is

23 amended by redesignating subparagraphs (H) and

24 (I) as subparagraphs (I) and (J), respectively, and
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1 by inserting after subparagraph (G) the following

2 new subparagraph:

3 ‘‘(H) IMPORTED PROPERTY INCOME.—The

4 term ‘imported property income’ means any in5 come received or accrued by any person which

6 is of a kind which would be imported property

7 income (as defined in section 954(h)).’’

8 (3) LOOK-THRU RULES TO APPLY.—Clause (i)

9 of section 904(d)(3)(F) of such Code is amended by

10 striking ‘‘or (E)’’ and inserting ‘‘(E), or (H)’’.

11 (d) TECHNICAL AMENDMENTS.—

12 (1) Clause (iii) of section 952(c)(1)(B) of the

13 Internal Revenue Code of 1986 (relating to certain

14 prior year deficits may be taken into account) is

15 amended by inserting the following subclause after

16 subclause (II) (and by redesignating the following

17 subclauses accordingly):

18 ‘‘(III) imported property income,’’.

19 (2) Paragraph (5) of section 954(b) of such

20 Code (relating to deductions to be taken into ac21 count) is amended by striking ‘‘and the foreign base

22 company oil related income’’ and inserting ‘‘the for23 eign base company oil related income, and the im24 ported property income’’.

25 (e) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section

3 shall apply to taxable years of foreign corporations

4 beginning after December 31, 1994, and to taxable

5 years of United States shareholders within which or

6 with which such taxable years of such foreign cor7 porations end.

8 (2) SUBSECTION (c).—The amendments made

9 by subsection (c) shall apply to taxable years begin10 ning after December 31, 1994.

11 SEC. 3. IMPROVEMENTS IN THE COLLECTION OF UNITED

12 STATES TAXES OWED BY FOREIGN PERSONS.

13 (a) FINDINGS.—The Congress finds that—

14 (1) there is evidence suggesting that foreign15 controlled corporations doing business in the United

16 States do not pay their fair share of taxes;

17 (2) over 70 percent of foreign-controlled cor18 porations doing business in the United States pay no

19 Federal income tax;

20 (3) the United States Department of the Treas21 ury has limited its ability to protect the revenue base

22 in the case of cross-border transactions, to the det23 riment of taxpayers engaged solely in domestic

24 transactions;
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1 (4) the United States Department of the Treas2 ury has been using antiquated accounting concepts

3 to deal with sophisticated multinational corporations;

4 (5) substantial Federal revenues are lost annu5 ally due to the inability of the Internal Revenue

6 Service to enforce the ‘‘arm’s length’’ transaction

7 rules, along with substantial amounts spent on ad8 ministration and litigation;

9 (6) current procedures of the Internal Revenue

10 Service are insufficient for ensuring that a foreigner

11 who is not a resident of a foreign country does not

12 take advantage of the treaty benefits of that coun13 try; and

14 (7) current regulations and other positions

15 adopted by the Internal Revenue Service may permit

16 foreign persons to avoid United States taxes by uti17 lizing derivative financial products which replicate

18 the economic features of United States taxable in19 vestments.

20 (b) SENSE OF THE CONGRESS.—It is the sense of

21 the Congress that deficit reduction should be achieved, in

22 part, by ending loopholes and enforcement breakdowns

23 that now foster the underpayment of taxes on income from

24 cross-border transactions and enable foreign-controlled

25 corporations operating in the United States, and foreign
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1 persons investing in the United States, to pay no taxes,

2 including by—

3 (1) the adoption of a more streamlined and effi4 cient method of enforcing Federal tax laws involving

5 multinational corporations, especially those based

6 abroad, and, in particular, the use of by the Treas7 ury Department of a formulaic approach in cases in

8 which the current ‘‘arm’s length’’ transaction rules

9 do not work; and

10 (2) the promulgation of regulations by the Sec11 retary of the Treasury or the Secretary’s delegate no

12 later than December 31, 1994, which—

13 (A) establish certification, refund, or other

14 procedures which ensure that any treaty benefit

15 relating to withholding of tax under sections

16 1441 and 1442 of the Internal Revenue Code of

17 1986 is available only to persons entitled to the

18 benefit, and

19 (B) prevent the avoidance of withholding

20 of tax under such sections by use of derivative

21 financial instruments, including regulations pro22 viding for the sourcing of income of foreign

23 residents from notional principal contracts as
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1 income from sources within the United States

2 in appropriate cases.

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